Not Much Hedge Fun(d)

Rhode Island, like most states, is on the hedge fund band wagon. General Treasurer Gina Raimondo invested $900 million of the public pensions with the hedgies. She argues that it will reduce risk and help meet investment returns of 7.5%. Good luck with that.

Raimondo was quoted as saying she’s more focused on the downside than the upside. I called her office to discuss this with her. I have yet to get a return call.

What’s jaw-dropping is that she assigned the work to 19 separate hedge funds. Is that what she means by reducing risk? How thoroughly could these 19 funds have been vetted? How many meetings did she have to attend to get the list down to 19?

Having spent time working on the institutional side of the business, I know that most of these meetings end with “let’s have a follow-up meeting.” And I reviewed the minutes from the meetings. The presentations are like fingernails on a chalkboard. I’d have the patience for maybe one of them. It’s like sending 19 boats alongside the Titanic.

Can you imagine the rat’s nest of trades and positions, dealing with 19 hedge funds? Come on, people. Talk about the right hand not knowing what the left hand is doing. If these guys can’t even manage a gaming company run by a retired Red Sox pitcher, how well are they going to do watching over 19 hedge funds?

And hedgies don’t work for free. They have their yachts to pay for, with taxpayers forking over the 2 and 20. Hedge funds’ annual take is 2% of the assets they manage and 20% of the profits, if there are any. And if you pay the fees and then they lose the profits, don’t expect to see your fee returned.

Hedge funds make my skin crawl. They don’t invest. They gamble. With pensions, it’s gambling with other people’s money. Treasurer Raimondo is a fiduciary. As such, she should reconsider the risks and fees. I don’t like hedge fund investing for anyone who can’t afford to lose money. There is a reason only accredited investors are allowed to invest in hedge funds on an individual basis: they can afford to lose money. Pensioners cannot. This is not an area for public pensioners who depend on this money for their survival.

State treasurers will explain that they’re reducing risk based on textbooks and price theory models. But sometimes models don’t work. Real-estate prices were not supposed to fall. They were not supposed to be closely correlated to the stock market. But it turns out that in panics, everything is correlated—to the exit signs. That’s something you don’t learn in a textbook. Rhode Islanders should be outraged.

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E.J. Smith - Your Survival Guy

Preparing your investments and family for when disaster strikes.

E.J. Smith is the Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH, where he completed course-work in Practical and Defensive Handgun, Conceal Carry Pistol, Shotguns, Precision Scope Rifle and Kidnapping Prevention. E.J. plays a Yamaha Recording Custom drum set with Zilldjian cymbals. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com. Sign up here to receive all the best content from Richardcyoung.com each week.